Gregory A. Clay's Investor Report: Buyers Remained Sidelined

Market Summary

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U.S. stocks closed out the week with a whimper, turning big opening gains in the S&P 500 and Nasdaq Composite into losses by Friday’s close. A sharp selloff in biotech and health-care stocks spread to broader markets, weighing on sentiment. “A selloff in biotechs took the wind out of the rally. And in this low-volume environment traders are selling first and asking questions later,” said Ryan Larson, head of equity trading, U.S. RBC Global. The main indexes declined in six of the past seven trading days, since the Federal Reserve left its key borrowing rate unchanged on Sept 17, citing concerns over slowing global growth. The Dow remained in correction territory, or more than 10% away from its 52-week high. The Nasdaq also fell back into correction mode, while the S&P 500 was about 9.5% away from its 52-week high. The S&P 500 is on course for its first back-to-back losing August and September since 2011. As seen in the graph below, the Dow is now down 9% on the year, while the S&P 500 and Russell 2000 are both off 7%. Biotech stocks crashed this week to help drop the Nasdaq down 1% this year. For the week, the Dow shed 0.3%, the S&P fell 1.4% and the Nasdaq fell 2.9%.

Investment Analysis

"The shutdown in Washington could roil markets next week," reports Kate Warne. "People are putting that off because they don't know whether we know what will happen until the last minute. I think this time we know it's going to go down to the wire.(Boehner's resignation makes it more likely). With Boehner resigning, although not until next month, it clearly reflects on lack of Republican (consensus) in the House. It makes it more likely that there's a temporary government shutdown… and it would tend to trigger a negative market reaction but fortunately that doesn't tend to last very long." Lance Roberts, head of Streettalklive.com, said a key focus is "the posturing and threats from the Administration will likely cause additional market angst given an already weak market. This was the same backdrop as 2011 when we debated over the debt ceiling then."

Wall Street is bracing for a grim earnings season, with little improvement expected anytime soon. Analysts have been cutting projections for the third quarter, which ends on Wednesday, and beyond. If the declining projections are realized, already costly stocks could become pricier and equity investors could become even more skittish. Forecasts for third-quarter S&P 500 earnings now call for a 3.9 percent decline from a year ago, based on Thomson Reuters data, with half of the S&P sectors estimated to post lower profits thanks to falling oil prices, a strong U.S. dollar and weak global demand. The weak forecasts have some strategists talking about an "earnings recession," meaning two quarterly profit declines in a row, as opposed to an economic recession, in which gross domestic product falls for two straight quarters. As the stock market is goes through the end of quarter rebalancing you can see Treasuries are the only asset class with a quarterly gain as investors dump shift funds from equities to treasuries.